Australia, Canada, and Scandinavia: The Safest Bets in an Unsafe World

Australia, Canada, and Scandinavian countries share two important traits that should make them excellent places to invest/store capital in the coming years.  First, they boast strong and entrenched middle classes, which will guarantee a kind of political stability that can't be relied upon in other parts of the world. And second, their governments are in far less debt than their developed world counterparts (e.g. the U.S., U.K., Japan, European "peripherals").

Here are two fascinating charts to illustrate these points.

The first is a map of the world with countries colored according to their GINI coefficient.  The GINI coefficient is a measure of income inequality where 0 is complete income equality (everyone makes the same amount of money) and 1 is perfect inequality (all the country's income accrues to a single earner).  The higher the number, the greater the income inequality.  This map is interesting in that Europe, Canada, Australia, Scandinavia, and parts of central Asia (the green parts of the map) are really the only places in the world where one could say that a strong, practically unassailable middle class exists.

The second is a chart from Pimco's web site showing the debt-to-GDP ratio of a number of countries.  Notice that Australia, Canada, and a handful of Scandinavian countries look downright safe compared to the powder kegs represented by the U.S., U.K., Japan, and the so-called "peripheral" countries of the EU.

A third trait Australia, Canada, and Scandinavia share is that they are all major commodity producers, which makes them good plays on the commodity super-cycle that we are likely in at the moment.

Given all this, I would argue that if you're looking for places where debt defaults and political unrest are least likely to be a problem in the future, then Canada, Australia, and Scandinavia are what you seek.  This doesn't mean that those regions won't be affected at least somewhat by a sovereign default or political turmoil elsewhere in the world.  But, the odds are that they will be affected less than most.

A stronger dollar might be right around the corner

The conventional wisdom is that the latest round of quantitative easing by the US Federal Reserve (QE2) will weaken/debase the US dollar, drive up the cost of commodities, and fuel potential bubbles in overseas markets.  If this comes to pass, then buying gold and other commodities, emerging market equities, and the currencies of major commodity producers should be a very lucrative trade.  And, in fact, this was the case in the months leading up to QE2 and continued to be so in the days immediately following the Fed’s announcement (see this excellent chart). 

However, the past couple of days have erased some of those gains (and in some cases quite dramatically) as the US dollar has strengthened, commodities like sugar, silver, and cotton have come crashing back to earth, and stock markets around the world have shed value, including a 5% one-day drop in the Chinese market. 

What is going on here? Well, this article in the Financial Times explains a lot.  It’s impossible to know what really moves markets, but this article deftly calls into question the rationale given by people pursuing a dollar-debasement trade and offers reasons to believe that, contrary to popular belief, dollar strength may be in the offing in the near future.  Some of the key points are:

1) The bulk of QE2’s effects have already been priced into the market.  This isn’t difficult to swallow given that commodities and emerging markets have been on a tear since intentions for QE2 were first announced at the end of August, and the dollar has been weakening steadily ever since.  It’s hard to believe that such moves haven't already discounted most, if not all, of QE2’s effects, in which case the immediate post-QE2 rally may have been a blow-off top, the culmination of a “buy the rumor, sell the news” dynamic.

2) The US economy may actually strengthen, which will be positive for the US dollar.  Any future strengthening of the US economy – and especially any real improvement in employment – should cause the dollar to strengthen, which would be a drag on commodities (which are priced in dollars) and attract foreign capital into our markets, presumably eroding the premium that foreign markets currently enjoy.

3) Any increase in the use of capital controls by foreign governments will be positive for the US dollar and negative for emerging markets/commodities.  This is something we’ve already seen.  On Friday, Chinese equities experienced a 5% drop caused by a rumor that the Chinese government is going to have to raise interest rates over the weekend in order to stem the flow of hot money from the US and to dampen its troubling inflation rate.  There’s almost no doubt that other countries will soon have to follow suit, tightening their money supply just as the US is loosening theirs.  Further use of capital controls by emerging economies was even officially sanctioned during the recent G20 meeting - a not-so-tacit acknowledgment that more capital controls are probably on the way.

Although not mentioned in the FT article, I would add one more reason to be skeptical of the weak-dollar trade post-QE2: the evidence we already have from Japan’s attempts to use the same approach.  As this excellent post and this follow-up post detail, Japan’s attempts at quantitative easing earlier in this decade managed neither to weaken the yen nor to strengthen the Japanese stock market.  In fact, the opposite occurred; the yen strengthened further against the dollar, and the stock market continued its gruesome slide. 

It’s something of a truism that one should never "fight the Fed," but it's also an old Wall Street saw that savvy traders position themselves in the opposite direction from government intervention in currency markets (unless that intervention is extremely aggressive).  And, in the case of QE2, which is tantamount to government intervention designed to weaken the dollar (despite Obama’s ridiculous claims to the contrary), one may do well to fade the Fed, so to speak.  A stronger dollar may, much to many people’s surprise, be just around the corner.

QE2 Disproportionately Benefits The Rich

This is an extremely crude exercise, but it makes the point.  Here is a table showing how much money each of six hypothetical investors made today off the QE2 inspired rally in the S&P 500.  Just for argument's sake, I assumed each investor's capital was invested entirely in the SPY (a proxy for the S&P 500) and that today's gain was exactly 2% (it was actually 1.94%).  As you can see, a 2% gain for someone with a $10,000 portfolio is an awful lot less than a 2% gain for someone with a $10,000,000 portfolio.  I've also added a crude graph to show the exponential nature of these relationships.  Is it any wonder there's income inequality in America when the government is essentially giving away vast sums of money to people who are already unbelievably rich?

For a much more in-depth look at the relationship between Fed-driven asset inflation and income inequality in America, please see my previous post here.

If Ben Bernanke is worried about income inequality, then he should stop quantitative easing.

Recently there’s been a lot of attention paid to the enormous wealth/income gap in the United States and to the disappearance of the middle class. In fact, the success of Republican/Tea Party members in this week’s elections was probably fueled at least in part by working (or unemployed) people’s sense that they are being left behind, while Wall Street “fat cats” are enjoying government bailouts and lavish pay packages. This political backlash is likely to manifest itself in many ways, one of which is increased scrutiny of the Federal Reserve and its behavior. Many newly elected representatives have been pushing to audit the Fed- or worse, abolish it- for a while, and they will undoubtedly take up those battles with gusto once they are sworn in. The question is, are they just peddling populist outrage?  Or, is there a legitimate reason to blame the Fed for income inequality and other distortions in the US economy?

Before digging into that question, some background is in order. First of all, here’s a brief primer on the problem of income inequality in the US. 

The best survey of income inequality in the US is on Slate’s web site. Timothy Noah’s series on the issue covers all (or almost all) the important bases and provides some background on the essential points, which are:

1) Income inequality in the U.S. has increased dramatically since 1979.  In 1979, 8.9% of total income went to the top 1% of earners, while in 2007 the top 1% took home 23.5% of the total.  Meanwhile, real wages for the average worker have essentially remained flat in the neighborhood of $20/hour since 1964 with minor fluctuations along the way.

Source: Institute for Policy Studies, Executive Excess 2009, p. 2.

Source: Bureau of Labor Statistics, Current Employment Statistics, Average Hourly Earnings in 1982 Dollars. Converted to 2008 dollars with CPI-U.

2) Income inequality is usually explained mostly by differences in educational attainment, with the gulf between income for earners with advanced degrees and earners with only high school diplomas widening recently to unprecedented levels.

Source: Bureau of Labor Statistics

3) Income inequality is not generally believed to be the result of an upper class of “landed gentry” who simply live off their wealth while the rest of us toil.  Instead, the new rich derive most of their wealth from income they receive from work.  But, as we will see (and Noah doesn’t mention), it’s the specific nature of their compensation that reveals one of the key reasons the top 1% brings home so much more than the rest of us.

Another critical point about income inequality is that it is persistent and tends to be passed on from one generation to the next.  This runs directly counter to the idea that America is an ever-changing land of opportunity where rags-to-riches stories can come true.  In fact, as this article from the Economist points out, an individual’s prospects for social mobility in America are worse than they are in Europe, which is ironic, since -in the mind of the average American- Europe is a bastion of calcified Old World social structures that limit upward mobility.  This lack of mobility in the USA is presumably due to the fact that rich families tend to pass on educational and other advantages to their children, which they then use to land high-paying jobs, hence perpetuating the cycle.

So, what does all of this have to do with the Federal Reserve? Well, before I get to the ways in which the Federal Reserve supports and perpetuates this situation, I should point out that Ben Bernanke is well aware of it and has a sophisticated understanding of the issues, as this speech from 2007 demonstrates.   Bernanke clearly is concerned about income inequality, but what's interesting here is what he believes to be its causes.  Bernanke enumerates all the usual suspects- both for why skilled workers at the top make such outsized gains and for why people in the middle and below can’t seem to get ahead.  Differences in educational attainment along with the effects of technology and the “superstar effect” are all given as explanations for gains at the top, while the leveling effects of globalization, immigration, etc. are considered as reasons why the middle and below aren’t getting anywhere.

The one explanation conspicuously absent, however, is the increasing financialization of our economy and the enormous rise in asset values we have experienced since 1982, for which the Fed can take a lot of credit (no pun intended).  This, combined with the increasingly common use of stocks, stock options, and other asset-based forms of executive compensation is, in my opinion, the real source of income inequality.  And, since the Fed is largely responsible for fueling the asset inflation of the past 30 years by implementing ultra-low (and in some cases negative real) interest rates, quantitative easing, and other inflationary policies, it also bears a lot of responsibility for income inequality. Unfortunately, none of this is mentioned in Bernanke’s speech.

What exactly is the connection between asset inflation and income inequality?  It is, essentially, this: the richer you are, the more your compensation and net worth depends on the value of paper and other assets. For example, a quick look at any disclosure of CEO or top executive pay usually reveals that most of their income comes from stock option grants, deferred compensation tied to stocks, or some other form of asset-based compensation.  The CEO’s actual “salary” is usually only a small percentage of his or her overall compensation.  Remember, for example, that Warren Buffet’s salary is only $100,000 per year.  This chart from the AFL-CIO’s web site reveals that most CEO’s salary is only 1/9^th their total compensation, while well over half their total pay comes directly from the sale of stocks and/or options. 

This fact explains how a CEO can make $10 million dollars annually even though his “salary” is only $1 million per year. It also implies that without constant asset inflation, the kind of out-sized gains we've seen for top earners would not be possible, since the majority of those gains come from the sale of paper assets.

Another connection between asset inflation and income inequality is the fact that over half of all stock market assets owned in America are held by the top 1% of earners, as the following chart shows.

Source: Author’s analysis of Arthur B. Kennickell, “Ponds and Streams: Wealth and Income in the U.S., 1989 to 2007,” Federal Reserve Board Working Paper, January 7, 2009, Figure A3a, p. 63. Does not include assets held in money market mutual funds or tax-deferred retirement accounts.

This contributes even more to the ultra-rich's sensitivity to asset prices.  Regular working people whose individual paper asset wealth may range from $10,000 to a few hundred thousand dollars aren't affected nearly as much by asset price swings as are the ultra-rich, who typically own millions (or billions) of dollars worth of stock.  Because of this, it’s no wonder that the rich will do anything to keep the asset-inflation party going, even if it means printing money or incurring federal debts that will ultimately be impossible to pay back.  After all, for the average person who lives mostly off his or her salary, a 50% decrease in the stock market hurts but it may only represent a loss of wealth equivalent to one year's salary. For an ultra rich person, however, a 50% drop in the stock market means the loss of many lifetime's worth of earnings from a typical salary- money that could never be earned back unless asset prices re-inflate.

Against this backdrop, one can see why the stock market meltdown of 2008 was so frightening to elites.  For a brief moment- before massive government and Federal Reserve intervention propped up asset prices- the ultra rich had no way of paying themselves and saw their net worth reduced by more than anyone would be able to make in many lifetimes of working for a salary or wage.  Any stocks, options, or other asset-based compensation they owned or were promised weren’t worth enough to convert into the kind of income they had become accustomed to.   Since then, of course, government bailouts have re-inflated asset markets (if not the real economy), and the game continues.

It’s interesting to note that during times of asset deflation, some curious things have happened to compensation for the average worker, who lives almost entirely off of wages and not from assets.  For example, in the following breakdown of average real wages from 1982 to the present one can see that during the market meltdown of 2008 the real wages of the average worker actually increased.  

Source: TheChartStore.com

This momentary increase was quickly obliterated, however, as the market bottomed in the beginning of 2009, and ever since then we’ve been back in a Fed- and debt-fueled rise in asset prices that has made the top 1% very rich and driven the average worker’s real wage back down to right where it was in 1964.

So, what’s the lesson here?  Essentially, the Fed and the Federal Government, by bailing out banks, printing and borrowing money, and supporting asset prices no matter what the cost, is perpetuating the income gap they claim to be trying to eliminate.  Avoiding the specter of deflation at all costs is the justification of all expansionary monetary policy, even though deflation (and especially asset deflation) may, in fact, be the only thing that corrects the imbalances in our economy and restores the average worker’s purchasing power and some sanity to our system.

When Bernanke announces today that he will print even more money to “save us from deflation,” he should know that he’s only perpetuating gross income inequality in America and, by extension, a system that all too many of us have realized is rotten.  It will be no surprise if he is taken to task for it in the near future by our newly elected representatives.

For more on the potentially tonic effects of deflation, see this thought provoking essay.

What to make of gold?

If we are to believe Shayne McGuire, a Texas pension fund manager quoted in this weekend’s Wall Street Journal, the price of gold is set to rise to $10,000 an ounce.   As the Journal points out, this puts him in the same dubious company as those stock market prognosticators who, in the 1990’s, predicted the Dow would inevitably rise to 36,000 and the NASDAQ would eventually top 10,000.  Well, we all know how that turned out.

But, Mr. McGuire isn’t alone in his predictions that gold has farther to run, and many who share that view are quite savvy.  George Soros, John Paulson, and Marc Faber have all predicted that gold will continue to rise (eventually)- even from these levels (see this article from August 2010 detailing some top fund managers’ gold holdings).  Moreover, many have pointed out that gold is far from in a bubble.  Brett Arends included a nice chart in a recent article that shows exactly how much farther gold would have to climb in order to achieve a status akin to the real estate and NASDAQ bubbles of the recent past.  There is also an excellent video on the FT.com site that compares the recent gold run up to a selection of past asset bubbles- including the gold bubble of the 1970’s.   Both these sources make it clear that gold is far from a bubble and could easily rise six-fold from here before it would match levels achieved in previous bubbles.

So, what are we to make of this?  Should individual investors load up on gold, as apparently many would like to?  Or, should they dump it if they have it and invest in stocks?  Well, I don’t have a crystal ball, but I do find it helpful to view this situation through a different lens: gold’s value relative to the S&P500.

The following chart shows the value of the S&P 500 relative to gold from 1970 to the present.

 As you can see, during the height of the gold bubble in the 1970’s, gold was worth almost six times more relative to the S&P500 than it is now.  This confirms what the comparisons to past bubbles have shown, which is that gold could still run a lot farther – even relative to stocks – if it is, in fact, headed for another bubble. 

What the chart also shows, however, is that gold has had a pretty good run over the last ten years or so relative to stocks.  The ratio of the S&P500-to-gold peaked in 1999 (at the height of the tech stock bubble) at 5.59 and is now trading only slightly above the low of 0.71 it hit at the bottom of the recent meltdown.  The S&P500 looks even cheaper relative to silver, where its relative value is below where it was at the low of the market meltdown in 2008, as the following chart shows.

 Given all this, what are we to do?  Should people buy precious metals in anticipation of a six-fold run up from here- in other words, a repeat performance of the 1970’s bubble?  Or is now the time to take profits in metals and buy stocks? 

I think the answer to that depends almost entirely on how irresponsible the Federal Reserve is in the coming months.  If you think that Ben Bernanke has lost his mind and is about to turn the USA into the United States of Zimbabwe, then gold is probably setting up for a nice run from here.  If, however, Bernanke acts as cautiously as he has hinted he will, and the US dollar doesn’t collapse, then now might actually be a great time to sell gold/silver and buy stocks.  A cautious Bernanke combined with a strengthening US economy would be even more bullish for stocks and bearish for metals.  The combination of the strengthening dollar and rising corporate earnings would drive down the price of gold while simultaneously supporting share prices.

So, which position you choose depends mostly on what you think will unfold in Act II of the Quantitative Easing drama.  My bet, if I may be so bold, is that Bernanke isn’t as big a fool as some think, and the market will ultimately be disappointed by the amount of easing he chooses to put into effect.  As a result, metals will weaken, stocks will ultimately rise, and a full-blown gold bubble will not materialize.  This is, undoubtedly, the optimists’ view and probably the minority view at the moment.

But, for anyone who agrees with me, my advice is to sell your gold and buy the S&P500.  And, if you’re feeling fancy, you could even short GLD and go long an equal (or greater) percentage of SPY’s, for example.  Such a position would act as a hedge if there's a sudden synchronized downturn in both stocks and metals, while it would be profitable if metals and stocks eventually decouple and stocks  outperform gold (for more on how stocks have usually outperformed gold in the past after a period of synchronized moves in gold, equities, and bonds like we've just experienced, see this video).  Of course, don’t sue me if it turns out badly- you’re money and your decisions are your own business- but it seems to me that the only way such a position could go sour is if Bernanke is a reckless fool.  And, I just don’t think that’s going to happen.  The man, as much as I disagree with some of his actions, is extremely shrewd and careful, and I don't think he's about to print money willy-nilly.

For those of you who don’t want to take just my word for it and prefer the comfort of being aligned with professional investors, a recent survey of money managers in Barron’s revealed that 62% of professional managers polled think that stocks will be the best performing asset class over the next 12 months, while only 15% believe that gold/metals will be.   Usually, going with the crowd isn’t a good idea in the investment world, but this crowd is one whose opinion must be taken seriously, since they are the ones with the most capital to deploy and, as a result, their prophecies are often self-fulfilling.  If I have to choose a bandwagon to join, I’d rather it be theirs than the “goldbugs” currently populating chat rooms and tea party rallies- even if it means ignoring our Texan friend Mr. McGuire's prediction about gold's inevitable date with $10,000.  

In any case, here's hoping Bernanke is "careful" on Wednesday when he announces his intentions for the next round of quantitative easing.  It might disappoint the markets in the short-term, but in the longer run it will be better for all of us- especially those of us who are bullish on stocks and skeptical of precious metals.

Quantitative Easing is a Ponzi Scheme in which the Government is the Greatest Fool

US Government debt now exceeds 90% of GDP

Bill Gross, one of the world's largest bond fund managers, in his November Investment Outlook finally called quantitative easing what it is: a Ponzi scheme.  According to Gross, both the government's financial stability and the value of its current bonds depend largely on the existence of new buyers willing to buy future bond issuance.  In other words, the government can issue IOU's and expect them to retain value only as long as there continues to be a supply of customers willing to buy new bonds in exchange for the promise of a "certain" return.  As long as this situation persists, the government can pay its earlier bond buyers interest with the money it gets from its newer buyers, and so on ad infinitum.

Of course, one might wonder if the interest on existing bonds can't simply be paid with tax receipts.  Unfortunately, tax receipts do not cover all the government's funding needs.  So, even though the interest on existing bonds could be paid entirely with tax receipts, this could only happen if the government cut other spending.  The current gap between government expenditures and government receipts is such that without a constant influx of new money raised from bond sales, the government would be forced to cut expenditures drastically just to have enough cash to make interest payments on existing bonds.  The chart below illustrates the difference between government expenditures (the orange line) and receipts (the black line).

Government expenditures exceed receipts by a wide margin

This chart illustrates a situation in which new bonds must be sold in order to raise money to pay the interest on existing bonds and to fund ever-expanding government spending, since tax receipts alone will not cover all the government's costs.

Unfortunately, this sounds an awful lot like a Ponzi scheme.  And it all starts to unravel when the government can no longer find enough willing buyers for its debt (e.g. the Chinese, banks, and money managers like Gross), because buyers have lost confidence in the government's ability to keep the scheme going.  So, the government is forced to buy its own debt by printing more money and then using it to buy its own bonds.  This money can then be used to pay the government's earlier customers (e.g. the Chinese, the banks, and money managers like Gross) their interest, keeping the game going for a little while longer.  But then the money itself starts to seem questionable.  After all, any new money that's printed simply dilutes the value of money already in circulation, does it not?  The Fed isn't creating any new value when it prints another trillion dollars, is it?  In fact, what Gross points out is that the Fed is actually creating inflation (their stated goal, by the way), which is bearish for bonds and ultimately means they will fall in price and rise in yield as the market adjusts to higher inflation.

In the end, this means that the government is probably buying at the top of the market, and savvy investors will likely be lining up in droves after Wednesdays QE announcement to sell their bonds back to the government. Gross' article reads to me like a pretty clear indication that he plans to do exactly that.  And he owns enough bonds to really move the market.  It can't be long until other large players follow his lead, and (in Gross' words) "the Fed’s announcement will likely signify the end of a great 30-year bull market in bonds..."  If this scenario pans out, then the government- by buying trillions worth of bonds at their peak- will essentially be playing the role of the greatest fool in a game of selling-to-the-greater-fool that has run out of fools.

An ancillary- but possibly even more outrageous-  byproduct of this action, as Gross points out, is that it changes the government's role from being the referee who guarantees that the invisible hand of capitalism is allowed to work (i.e. by providing a rule of law, enforceable property and contract rights,  and maintaining a competitive marketplace by inhibiting monopolies, etc.) to being an active participant in the market.  The government is now a player in the game, not just the referee.  And, at the moment, it is the biggest player.  As such, the government threatens to squeeze out all the other players and, in fact, has already created a distorted macro market environment in which all assets move primarily based on what people believe Bernanke will do next.  Other considerations- like earnings, employment, supply and demand, etc.- are trumped by one all-important factor: how much money Uncle Sam is planning to print (here's a good video on the recent synchronized movement of assets and a good piece by Michael Santoli of Barron's in which he mentions this dynamic). 

This is not a healthy situation and one that is likely to end in another crisis for the financial (and political) system.  If it doesn't happen right away, and we enjoy some illusory prosperity thanks to money printing, then we will be experiencing nothing different from what Weimar Germany or Zimbabwe first experienced when they tried printing their way to prosperity.  Inflation feels good- at first.  But, after people realize that the currency raining down upon them in the form of higher wages and/or asset prices isn't holding its purchasing power in the face of even more rapidly rising prices for essential goods and services, then bad things can happen.  Did I already mention Weimar Germany as an example?  I think we all know what happened after that.

For more reading on the subject of sovereign debt, I highly recommend Reinhart and Rogoff's "This Time is Different."  One of R&R's essential points is that once a country reaches a debt-to-GDP ratio that exceeds 90%, it is extraordinarily difficult to avoid falling into a debt trap in which the compounding costs of servicing debt eventually exceed the government's ability to pay, and a default becomes inevitable.  It's worth noting that the U.S. government's debt-to-GDP ratio currently exceeds 90%.

Benoit Mandelbrot, mathematician and inventor of fractal geometry, dies at 85...

This Guardian article is a nice survey of Mandelbrot's career and the development of his best-known contribution: fractal geometry. 

What The Guardian doesn't mention, however, is Mandelbrot's equally interesting work on price behavior, which he presented in a relatively recent book, The (Mis)Behavior of Markets.  Mandelbrot's basic thesis is that prices have "infinite variance" and are not normally distributed.  In other words, a set of price data ultimately won't fit into a bell-curve-like distribution, but instead looks more like a bell curve that gets wider at both extremes.  It's essentially the "fat-tail" idea that has recently become popular in other fields applied specifically to price data.  Mandelbrot began developing this theory while researching the price of cotton-  analyzing price data going all the way back to the 19th century.  Ironically, the price of cotton just hit a 140-year high- an extreme that surely lies far out on the right hand extreme of a distribution of historical cotton prices.

Here is an interesting video from FT.com about Mandelbrot's impact on financial theory.

Here's another video in which Mr. Mandelbrot himself talks about how his thinking differs from the theory of efficient markets.

A simple but important illustration of the power of diversification...

A diversification study from Ed Seykota's site.

The effects of correlation need to be taken into consideration when performing an exercise like this, but the essential point is still valid and important (i.e. that using a broad basket of investment strategies -provided they have a statistical edge to begin with- will smooth out drawdown and increase overall return).

The trouble with multitasking...

 The Myth of Multitasking.

Although multitasking is often presented as a virtue, evidence suggests that productivity suffers and stress increases when people multitask.  Learning to focus and pay close attention may, in the end, be far more useful than learning to multitask in an environment full of distractions.

(Even) more unintended consequences of quantitative easing...

   It's a fairly well established fact that cheap money printed by the US Fed is chasing higher yields in overseas markets, where raging asset prices and higher yielding currencies make for more attractive investments than US-based assets.  This pursuit of hot markets and stronger currencies is possibly becoming self-reinforcing and starting to exhibit bubble-like dynamics.  For more on the bubble-making tendencies of easy monetary policy as well as its current effect on emerging/overseas markets see Billige Dollars bereiten nächste Finanzkrise vor and Fed's Danger of Leaks with QE2.
   One particularly egregious example of this is Hong Kong.  Here is a chart of EWH, an ETF composed of a basket of Hong Kong stocks that trades on the NYSE:

Notice that the run-up began just as the markets started to believe that QE2 was on its way.   What's wrong with this?  Well, nothing if you are a sophisticated American investor or a rich person living in Hong Kong.  For everybody else, however, this is a disaster.
   The problem is that this sort of asset-only boom only enriches the people at the very top of the economy (i.e. people who already own lots of assets like stocks and real estate).  It does nothing to help the middle and lower classes, since these gains seldom translate into wage and employment gains.  If anything, these asset-only gains hurt middle and lower income earners by making the cost of real estate and food prohibitively high.  For a particularly depresssing example of this, see this video about people living in cages in Hong Kong.
   A less stark version of this dynamic is playing itself out in the U.S. today, where Wall Street executives are set to receive record pay while the official unemployment rate still stands at 10%.  A Barron's reader left a comment recently that aptly summarizes the American dynamic:

"The fed is destroying the American middle class. My grocery bill is up, my heating bill is up, and it costs more to fill my gas tank. Meanwhile, I earn no interest in savings, have a flat paycheck, and have a 401K that is too small to benefit from asset inflation."

   Let's hope that Ben Bernanke, who is a very smart man, is thinking this through.  I don't envy his position, but it might be time to stop the presses and let the economy adjust the old-fashioned way...

QE2 as a game theory optimization problem...

Myron Scholes on QE2.  Points #4 and #5 are particularly interesting.  QE2 really does feel like a game theory optimization problem working itself out in the real world.  If Bernanke makes the optimal move (and the world recognizes that his move is optimal), then QE2 may be harmless/net positive.  If, however, Bernanke doesn't make the optimal move (and/or the world doubts or doesn't think that he has done so), then the negative effects of QE2 will likely outweigh the positives (i.e. other countries may respond in a way that causes everyone to lose).  Which outcome seems more likely?

Even The Party faithful are censored by their own watchdogs...

Chinese ex-officials seeking end to censorship are censored themselves.

It seems to be a characteristic trait of totalitarian governments that they set up "departments" whose original purpose is to suppress opposition but which eventually evolve into self-sufficient power centers that are hellbent on their own preservation and that nobody can control- not even the bureaucrats who set them up in the first place. Looks like the Chinese Central Propaganda Department is the latest example of this...

Doubts from within the hallowed halls of the Federal Reserve...

Would QE2 Have a Significant Effect on Economic Growth, Employment, or Inflation?

Apparently, not everyone with a job within the Federal Reserve system thinks that quantitative easing will have the desired effect.

More cutting edge ways to invade your privacy...

'Scrapers' Dig Deep for Data on Web

This is both scary in general and an excellent example of how our laws often don't keep up with technological change.

If architecture is "frozen music," then what is music?

 Michael Levy's "Giant Steps" Animation

 Music Animation Machine

A few excellent examples of music made visual.

Sing it Alan Murray...

The End of Management

Corporate bureaucracy is becoming obsolete. Why managers should act like venture capitalists 

If this is actually true, then life within corporations should improve for the average worker.

The Checklist...

The checklist may be the best management tool ever invented.

The internet at its best...

http://www.khanacademy.org.

To me, this represents the promise of the internet fully (or almost fully) realized.  These high quality educational resources can be accessed for free by anyone with a computer (or smartphone) and a fast internet connection.  The democratization of education this represents is a true cause for celebration and should be modeled/imitated by others.  Sal Khan deserves all the good things that come his way.  Let's hope thousands of kids (and adults) find their way to his site and maybe even a little enlightenment there.

A thought provoking essay on the internet and the self...

Kampf ums Ich

one of the funnier lines...

"Die Renaissance hat einst dem Ich das Bewusstsein geschenkt. Ein halbes Jahrtausend später ordnet Google auch das neu. Wer die Suchmaschine nach "Renaissance + Ich" suchen lässt, erhält als ersten Treffer ein Urlaubsresort in der Karibik."

Gimme back my housing bubble!

Compared to this, the housing bubble will be seen as a productive and efficient allocation of resources.  At least the housing bubble left a huge stock of poorly/hastily built houses that may someday be used as actual homes (except, unfortunately, for the ones built with toxic Chinese drywall).  But this gold thing isn't doing anybody any good...

Uh, Oh! The Rich Are Buying Gold Again

The Money Illusion...

This is the ultimate example of what economists call the "money illusion."  If you think your 401k/stock portfolio has been increasing in value over the last 18 months, think again...

Finally, somebody in the West admits that it takes two to tango...

Currency impasse

More scary european nationalism...

Sarkozy's War Against the Roma

This is a good thing...

The US gov't could use some credible competition in this arena- especially when it comes to inflation stats.

Google to map inflation using web data

Unreal!

Tamagotchi

Gameplay

Upon removing the tag of a Tamagotchi unit, an egg will appear on the screen. After setting the Tamagotchi unit's clock, the Tamagotchi will hatch after several seconds, after which the player will be told of its gender and will be given the opportunity to give it a name, which can be as long as 5 to 8 characters in length. From then on, the player is given the task of raising the Tamagotchi to good health throughout its life and attending to its needs, such as feeding it, playing games to make the Tamagotchi happy and keep it at a healthy weight, cleaning up its excrement, punishing or praising the Tamagotchi based on its actions, returning it to proper health with medicine if it gets sick, and shutting off the lights when it goes to bed. If the Tamagotchi is left uncared for, it will soon result in the death of the Tamagotchi.
As time passes, the Tamagotchi will evolve through various stages (Baby, Toddler/Child, Teenager, Adult, and Senior), the results varying based on the gender of the Tamagotchi, its current generation, and on the player's actions. A Tamagotchi that has been cared for well enough will result in a better and a well-mannered Tamagotchi, while excessive poor care will instead result in a Tamagotchi that requires much more attention and often does not behave well. Upon reaching a specific age and friendship level with another Tamagotchi, the player's Tamagotchi will be able to mate with another Tamagotchi of the opposite gender, usually arranged by an elderly Tamagotchi known as "the Matchmaker" or "Mrs. Busybody". Once the two Tamagotchis mate successfully, the female produces two infant Tamagotchis, one which is kept by the father, and the other by the mother. After 24 hours pass, the parent leaves the baby, starting a brand new generation.

 

The US is #1 in attempts to censor the internet. China is "?"

http://www.google.com/transparencyreport/governmentrequests/

 

A new specter haunting Europe?

Continent of Fear: The Rise of Europe's Right-Wing Populists - SPIEGEL ONLINE - News - International

 

Economic protectionism, currency manipulation, and good old-fashioned right wing populism are all variations on the same theme - keep the foreigners and the unknown out of my society.  Unfortunately, while Europe has a relatively enlightened understanding of how to manage their economy, there's a disturbing trend towards the anti-enlightenment in their immigration and integration policies. 

George Soros on China's currency policy...

China must fix the global currency crisis

This is pretty depressing. One of the things Soros is saying is that the Chinese practice of offsetting their trade surplus by selling yuan/buying dollars essentially transfers the fruits of the Chinese people's labor into the pockets of the Chinese gov't ("it has the same effect as taxation but it works much better"), which then allows the government (not the people) to decide what to do with the surplus (which has been converted into us dollar reserves). This would be bad enough if it weren't for the fact that other countries must now follow suit (mostly because of the Fed's quantitative easing and China's insistence on maintaining their weak currency). It's happening as we speak at the IMF. Several countries have already announced capital controls. The fruits of people's hard work all over the world are being sucked up into gov't coffers and converted into US dollar reserves as part of a lose-lose game that nobody is willing to give way on. Geithner blames China, China blames Bernanke, and everyone else scrambles to weaken their currencies at the expense of their own workers, who could be spending their surplus on goods and services (like education) that would improve their own lives. The upshot here is that Chinese currency policy isn't really about enhancing the Chinese economy. It's about maximizing the Chinese gov't's control over its people. And now that same policy is being exported to other emerging economies who have no choice but to artificially weaken their own currencies at the expense of their population's autonomy.

A Catalog of Human Error...

Wikipedia's List of Cognitive Biases.

This is a good list to peruse before you make any life-changing decisions or, perhaps, before you go into the office on a Monday morning...

Why a blog?

Well... I spend an awful lot of time reading things on the internet, linking from page to page as I get into a specific topic.  I often stumble onto interesting (at least to me) and occasionally arcane articles, videos, blogs, etc. that I would like to keep track of somehow and share with others in the process.  I could use Facebook for that I suppose, but I'd like to experiment with posting the links (and sometimes my commentary on them) here and then seeing what happens.  If nobody is really that interested, then this will at least become an archive for my own personal use.  If, on the other hand, like-minded people find their way here and extract some value from this, then so much the better.  I'm not looking to convince anyone of anything or even to express a cohesive viewpoint on a particular topic.  I'm just collecting links to ideas I find exciting and/or important in these times and hoping that like-minded people may someday stumble onto this resource and jump in with their own references and ideas.  Will it work?  Who knows, but I intend to have fun either way.